Stock Analysis

Is Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien (ETR:BVB) A Risky Investment?

XTRA:BVB
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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Borussia Dortmund GmbH & Co. Kommanditgesellschaft auf Aktien (ETR:BVB) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien

What Is Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien had debt of €28.8m, up from none in one year. However, because it has a cash reserve of €581.0k, its net debt is less, at about €28.2m.

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XTRA:BVB Debt to Equity History April 19th 2021

How Strong Is Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's Balance Sheet?

The latest balance sheet data shows that Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien had liabilities of €162.2m due within a year, and liabilities of €57.9m falling due after that. Offsetting these obligations, it had cash of €581.0k as well as receivables valued at €21.0m due within 12 months. So its liabilities total €198.6m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien is worth €464.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien made a loss at the EBIT level, and saw its revenue drop to €344m, which is a fall of 26%. That makes us nervous, to say the least.

Caveat Emptor

While Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping €75m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €104m of cash over the last year. So in short it's a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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